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Holding promissory notes in a retirement account

Promissory notes, including trust deeds and mortgage notes, are an appealing asset type for many investors because of their potential for positive cash flow and above-average yields. And if you hold these debt obligations in an IRA, you get the benefit of favorable tax treatment, as well.

Despite the demand, most broker-dealers will not permit investors to hold promissory notes in their IRAs because they don’t have the specialized knowledge these investments require. And because there’s often increased administration required, these broker-dealers just don’t want the hassle.

PENSCO Trust Company, on the other hand, has over two decades of expertise as an alternative asset custodian and posess knowledge and experience with IRS rules and regulations for holding notes in an IRA. We’ve helped thousands of investors hold debt obligations in their qualified retirement accounts, using our years of experience to handle the custody of these assets while providing outstanding service. 

Types of Promissory Notes

Promissory notes can be advantageous for retirement accounts because they’ve historically provided greater yields than the dividends and interest of stocks, mutual funds and cash instruments. They also offer flexible terms, which allow investors to choose the debt obligation that works best for their personal investment risk profile. And since investing for the long-term is common in retirement accounts, the illiquid nature of promissory notes (buyers can be difficult to find on the secondary market) is generally not an issue. Holding these debt obligations until maturity or payment in full is not typically a hardship. PENSCO allows investors to hold three types of notes in a retirement account:

  • Secured notes (real property)

    Standard real estate mortgages with fixed principal and interest payments that are made to the investor’s IRA each month are the most common. Investors can also choose development loans that have a balloon payment at project completion and maturity dates ranging from a few months up to a traditional 30-year mortgage.

  • Secured notes (other collateral)

    Underlying collateral for these notes can include mobile homes, equipment, corporate stock, mortgage pools and livestock. Terms are generally shorter than 30-year mortgages, with an average of 1–10 years. They have different risks than notes secured by real property because of equipment depreciation, the success of the company issuing the stock and other variables that can impact the collateral’s value.

  • Unsecured notes

    These are the riskiest type of note because there is no collateral to repossess in the event of default. However, they generally carry higher interest rates than secured notes. Examples of unsecured notes can be individuals seeking a loan or companies looking for a piece of debt financing, such as a bridge loan. Terms are generally shorter, maturing in less than 10 years.

 

Note: PENSCO Trust Company performs the duties of an independent retirement custodian, and, as such, does not provide investment advice, sell investments or offer any tax or legal advice. PENSCO is not affiliated with any investment, investment sponsor or investment advisor. Potential clients are advised to perform their own due diligence in choosing an attorney, tax advisor, or any investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. This information is for general purposes only and is not intended as an individual recommendation or to be a substitute for specific individualized tax, legal or investment planning advice.